TIPS FOR PICKING A CONTRACTOR:

Work with one general contractor that can handle the entire job from start to finish. This way they will be responsible for all the sub-contractors.

Make sure the contractor is approved by your lender

Make sure the contractor has a lot of experience with 203K renovations. (more than 50 jobs completed)

Make sure the contractor warranties and guarantees their work.

Make sure you get a detailed, written scope of work and price breakdown from the contractor.

Don’t be so tight or try to get the lowest price. The good contractors are busy and they are NOT the cheapest, but this is no time to try to save a few dollars. A good contractor is worth their weight in gold and will ensure you get the best finished product with the least amount of hassle or costs.

Be open minded and a good communicator with your contractor. They will appreciate it and the more they know about what you want and the things you like, the better they can help you get them.

Be honest with them about your budget and be flexible with the costs. Most people get sticker shock if they just ask for a bid on everything. So have a MUST HAVE’S list and a WISH LIST to go over with the contractor.

Make sure the contractor can fund the project and agrees to the lenders terms for funding the project.

203K HOW IT WORKS:

#1 GET PRE QUALIFIED FOR A LOAN – Before you look for a home it is important to be pre-qualified for a mortgage by an experienced 203K Lender. (We can provide you with a list of recommended lenders). Once you know the maximum loan amount you qualify for it’s time to find a home.

#2 WORK WITH AN EXPERIENCED 203K REALTOR – Not just any old Realtor will due for this type of purchase. . (We can provide you with a list of recommended Realtors)The agent must be able to help you find target properties that need work, but also can be purchased at the right price to allow the additional renovation costs to be rolled into the mortgage without going over the current market value for similar homes in that area.

#3 WORK WITH AN EXPERIENCED 203K CONTRACTOR – This may be the most important of them all. Getting the wrong contractor is where things can go really wrong. So, only work with a licensed, bonded, insured and experienced 203K Contractor.

#4 GET A HOME INSPECTION BY AN EXPERIENCED HUD INSPECTOR OR HUD CONSULTANT – This is very important so you and your contractor know exactly what things need to be fixed to pass FHA guidelines. Your Home Inspector or HUD 203k Consultant (We can provide you with a list of recommended inspectors) will conduct a property inspection and provide you with a written report that identifies FHA required repairs and any other issues the home may have.

#5 PROVIDE A COPY OF YOUR INSPECTION REPORT TO YOUR CONTRACTOR – This is to insure that all needed repairs are included in your bid plus all of your desired improvements.

#6 AGREE TO A FINAL SCOPE OF WORK WITH YOUR CONTRACTOR - Once you have decide on the list of improvements and prices your contractor can then prepare a work-write up for your lender. The work write up is a detailed list of improvements and costs. This is what your lender needs in before they can order your Subject To Appraisal.

#7 LENDER ORDERS APPRAISAL – This appraisal is basically the value of the home after all improvements are done. The appraiser takes your purchase agreement and your bid from the contactor and performs the appraisal AS IF ALL THE WORK WAS ALREADY COMPLETED. The appraisal reflects what the estimated value of the home will be once all of the contracting work is complete.

#8 CLOSE YOUR LOAN AND TAKE POSSESSION OF THE HOME. – At the loan closing, the improvement funds are placed in escrow, renovation begins.

#9 CONTRACTOR STARTS THE WORK

#10 AFTER ALL WORK IS FINISHED – Your lender pays the balance due the contractor and the project is 100% complete and the file is closed. Your mortgage terms do not change and you simply make your monthly payment to the lender.

FAQ about 203K:

What is an FHA 203k Loan? The FHA 203K renovation loan program provides funds for both the purchase of the home and funds to pay for the renovation of a home. All of the costs are packaged into one mortgage loan with one payment. Once the purchase of the home is closed, renovation funds are held in escrow to pay for pre-determined renovation work done by approved 203K renovation contractors.

When is the 203K Loan used? This loan is used typically for homes that need repairs and for homes that will not pass FHA or local code. The purchase of a house that needs repair is often a catch-22 situation, because the lender will NOT lend the money to buy the house until the repairs are complete, and the repairs can NOT be done until the house has been purchased. So the home just sits in disrepair until someone can pay cash for the home or use the 203K Loan Program to buy and repair it. HUD's 203K program can help home buyers overcome these obstacles by enabling them to borrow both the funds for the purchase or refinance of a property plus the renovation funds all in one mortgage. The FHA-insured 203K loan is provided through approved lenders nationwide and is available to owners who will occupy the home themselves to live in as a primary residence.

Who can qualify for a 203K renovation loan? Obviously loan program guidelines change, but for the most part the down payment, credit qualification, loan limits and other requirements are the same as standard FHA loans. Some additional guidelines are set forth specific to 203K loans. This is why it is important to first be pre-qualified with a lender before you try to buy a home using the 203K loan.

What are the different types of 203K loans? 1. The Standard 203K (also called the FULL 203K) is intended for more complicated projects that involve structural changes, such as room additions, exterior grading and landscaping, or renovation that would prohibit you from occupying the residence. A Standard 203K is also used if your project requires engineering or architectural drawings and inspections. The project can also become a Standard/FULL 203K if the renovation costs exceed $35,000. This type of 203K loan also requires a HUD Consultant for the project. The consultant verifies the work is complete and is the one who requests the funds from the lender to pay the contractor after work is completed. The payout process for this loan is typically in DRAWS, which are partial payments on the entire job as work is completed.2. The Streamlined 203K is designed for less extensive improvements and for projects that will not exceed a total of $35,000 in renovation and related expenses. This version does not require the use of a consultant, architect, and engineer or as many inspections as the Standard 203K. The payout process for this loan is typically in TWO DRAWS, which are typically 50% paid up front and the final 50% upon completion of the entire job.

What improvements are eligible under the Streamlined 203K?

The Streamlined 203K program is intended to fund uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. This program allows discretionary improvements and/or repairs such as the list shown below:

Basement finishing and remodeling, which does not involve structural repairs

Basement waterproofing, drainage and mold remediation.

Window and door replacements and exterior siding

Septic system and/or well repair or replacement

What items are ineligible for the Streamlined 203k?

Properties that require the following work items are not eligible for financing under the Streamlined 203k:

Major rehabilitation or major remodeling, such as the relocation of a load-bearing walls, foundation, etc.

New construction (including room additions)

Repair of structural damage

Repairs requiring detailed drawings or architectural exhibits/reports

Landscaping or similar site amenity improvements

Any repair or improvement requiring a work schedule longer than six (6) months; or

Rehabilitation activities that require more than two (2) payments per specialized contractor.

Mortgagors may not use the Streamlined 203K program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined 203K eligible work Items or that would:

Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;

Require plans or architectural exhibits;

Require a plan reviewer;

Require more than six months to complete;

Result in work not starting within 30 days after loan closing; or Cause the homeowner to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the homeowner would be able to occupy the property after mortgage loan closing).

What kind of property qualifies for the 203K?

This program is eligible for use on single family homes as well as 1 to 4 unit buildings; including the conversion of a building from a larger number of units down to 4 or less. Following specific guidelines, the 203k mortgage can also be used on a condominium unit for improvement of the interior only. Provisions also allow for financing mixed-use buildings, such as those with retail or commercial space combined with residential. In these cases, the 203K loan can only be used for the residential portion of the building.

How is the homes appraised value calculated?

The appraiser is given a copy of the contractors bid documents to identify the repairs and remodeling to be done along with their costs. The appraiser then determines the value of the home after completion, “subject to” the improvements to be made. In some cases, up to 110% of this value may be used for loan approval purposes.

Can a 203K be used to purchase a HUD-owned property?

A 203K loan can be used to purchase a HUD-owned property that is determined by HUD to be eligible for a 203K. If other funds are used for the purchase, a 203K loan can be made up to six months following the purchase, allowing cash back to the owner.

Can an Energy Efficient Mortgage (EEM) be used in conjunction with the 203K?

Yes – the FHA allows the use of an EEM, which provides funds beyond the FHA loan limits and the buyers approved loan amount for improvements that increase the energy efficiency and lower the utility costs of the home. An energy audit must be conducted by an approved home energy rater to assure that the energy savings over the useful life of the improvements will exceed their costs. The total amount of an EEM mortgage can be up to 5% of the value of the property. The 203K allows homeowners to amortize the cost of improvements that provide long-term cost savings over the life of the mortgage, enjoying the benefits of a lower interest rate than a short-term financing option would offer. Using an Energy Efficient Mortgage, these improvements can be added to a 203K loan, allowing home owners to exceed the FHA loan limit total by the amount of the approved energy efficient improvement costs. For many, this offers an opportunity to not only offset the cost of these improvements with utility savings, but even an overall reduced cost of home ownership. And in the process, we’re helping reduce America’s energy dependence.

How are loan funds disbursed for the purchase and renovation?

At the loan closing, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow. These renovation funds are then paid in draws to the contractors as the work proceeds with final payments following inspection at completion. The actual disbursement schedule, inspections and paperwork required are determined by the lender for each project and in conformance with FHA guidelines.

Is a borrower allowed to do the rehabilitation work?

YES, BUT ONLY Where a buyer can demonstrate professional expertise in a given activity, it is allowable. However, the borrower cannot be paid for labor, only materials used. Prior to loan approval, the cost estimate must reflect the cost for a contractor to do the work in the event the borrower is unable to finish and the contractor then must come in and finish the work.

What happens if there are extra unused funds after renovation is completed?

Any funds left over following completion of the renovation can be used to make additional allowable improvements to the property. If not used for this purpose, left over funds will be applied to pay down the principal balance of the mortgage.

Is there a time limit for completing the renovation?

The renovation must begin within 30 days of the closing of the loan and must be completed within the time frame established in the loan agreement. The total time for renovation must not exceed six (6) months.

What if the home is not habitable during renovation?

The Standard 203K loan does allow for up to six mortgage payments to be included in the renovation funds to cover the period when the home is uninhabitable during renovation. A Streamline 203K, however, cannot be used if the home will not be habitable at any time during the renovation.